The Costs of Jordan's Energy Insecurity

For decades Jordan has received subsidized energy from its Arab neighbors, owing in part to its role as a buffer state with Israel. Before 2003, Saddam Hussein's Baathist regime supplied Jordan with discounted crude oil, and shortly after the U.S. invasion of Iraq, Egypt began providing Amman with subsidized natural gas. With the erosion of security in Egypt following the ouster of former President Hosni Mubarak in early 2011, these pipelines have come under attack, with 14 reported disruptions in as many months. Amid the pipeline attacks, Egyptian authorities decided in January 2012 to reduce Jordan's subsidies on natural gas as a result of Cairo's own economic difficulties.

Due to its small economy, lack of import infrastructure and relative absence of domestic energy reserves, Jordan's heavy reliance on subsidized energy imports from its neighbors has left the kingdom in a precarious position. Egypt's decreased assistance and unreliable supplies have forced Jordan to import crude oil-based alternatives from Saudi Arabia at a higher price and consider implementing an unpopular electricity tariff on Jordanian consumers to make up the difference in cost. This move could further weaken the Jordanian government at a time when the monarchy is already confronting mounting internal criticism over stalled political reforms and economic mismanagement. As Jordan's dependence on Saudi Arabia grows, Riyadh may use Amman's vulnerability to coax Jordan into taking a more active role against the Syrian regime in exchange for financial support.

Before the Sinai pipeline attacks began in February 2011, Jordan relied on imported Egyptian natural gas for about 80 percent of its domestic electricity generation needs, importing about 6.8 million cubic meters (mcm) per day from Egypt with the remaining 20 percent generated by imported Saudi and Iraqi crude. Prior to the attacks, Jordan enjoyed a preferential price of about $113 per thousand cubic meters (tcm), well below the average of $282 per tcm Egypt usually receives for its natural gas on the spot market. Even after the Egyptian government raised the price of Jordan's imports to roughly $200 per tcm due to diminishing export revenue and dwindling tourism income, the price still offered a significant discount.

Jordan may have been able to tolerate higher prices, but a far more serious consequence of the attacks is the increasing unreliability of Egyptian exports. After a supply cutoff lasting most of March and April 2012, Egypt began sending test deliveries of about 2.25 mcm per day in May, still well below the contracted amount of about 6.8 mcm per day. With internal demand increasing and Egypt unable to secure the natural gas pipelines, Jordan has begun to make energy plans that exclude Egyptian natural gas.

Jordan has been importing an extra 100,000 barrels per day of crude oil to help offset the undelivered natural gas, 90 percent of it from Saudi Arabia. In 2011 alone, the extra crude oil and refined petroleum imports cost the Jordanian government more than $1.8 billion, raising the trade deficit to nearly $7 billion in an economy with a gross domestic product of $29 billion. Estimates for 2012 place added costs on Jordan's state power bill at $4.5 billion to $5.6 billion.

Due to its limited domestic refining capabilities and increased regional oil consumption, Jordan signed a contract with BB Energy in Greece to import 500,000 barrels of heavy fuel oil from June to August at a $34 per barrel premium above what it would pay regional suppliers. This move underscores both the steep discounts Jordan receives from its neighbors and the heavy costs inflicted by its own internal infrastructure bottlenecks.

Jordan may have been able to tolerate higher prices, but a far more serious consequence of the attacks is the increasing unreliability of Egyptian exports.

Attempts at Energy Diversification

Jordan's poor import and internal distribution infrastructure leaves it few options aside from costly oil-based alternatives to Egyptian natural gas. Because of the country's tiny import capacity at the port of Aqaba and the lack of a functioning internal pipeline network, Jordan's three largest natural gas-fired power plants used for electricity generation must be located adjacent to the natural gas pipeline at Aqaba, Risha and Rehab. Saudi exports shipped via the Red Sea supply the Aqaba power plant and leave little room for other suppliers. The other four state-owned power plants run on costly heavy oil and diesel fuel that must be trucked in overland, adding to the already high costs.

With Jordan already unable to meet domestic demand for refined petroleum products, the loss of Egyptian natural gas imports has increased costs for the country's lone state-owned refining complex and regulatory agency. As of March 2012, the Jordan Petroleum Refining Co. (JPRC) was more than $900 million in debt and estimated it would be unable to pay for or import more fuel in June without more government funding. JPRC is currently the only entity in Jordan allowed to refine, store, distribute, transport or sell petroleum derivatives.

Jordan has been looking for regional suppliers to help with its energy needs, though no proposals have yet come to fruition. Jordan held talks with Qatar in early 2012 to replace Egyptian natural gas; however, without a pipeline Qatar would need to supply natural gas to Jordan as liquefied natural gas (LNG). This would require building an LNG import facility at Aqaba, then constructing an internal natural gas distribution network to Jordan's other power plants. This is an extremely expensive proposition for Jordan, and even if Amman had the money, the infrastructure would take at least two years to build.

Though it lacks easily accessible conventional energy, Jordan does possess the fourth-largest oil shale reserves in the world — the equivalent of nearly 50 billion barrels of oil. High production costs of about $65 per barrel make extracting this resource prohibitively expensive, but rising Saudi oil costs have made it more economically viable. Jordan announced May 10 that it plans to bring the first barrels of domestically produced oil shale online by the end of 2012.

However, the oil shale deposits are located east of the Dead Sea, where the nearest power plants are designed to use natural gas or diesel fuel, and Jordan's lone refinery is unable to process oil shale. Jordan plans to build an oil shale plant by 2016 in partnership with Estonian Eesti Energia, a leader in oil shale technologies, but even then would need to rely on trucks to haul the oil from the refinery to Jordan's power plants. At best, Jordan's oil shale reserves are expected to satisfy about 14 percent of Jordan's energy needs. They do not present a long-term, affordable replacement for Egyptian natural gas and cannot provide any immediate relief to the current energy crisis.

Regional Implications of Jordan's Energy Dependence

As a fellow Arab monarchy, Saudi Arabia has provided Jordan with monetary aid and preferential oil prices in the past, most recently in the aftermath of the Arab Spring when Saudi aid grants helped Jordan cover its historic trade deficits. Following Jordan's reluctance to serve as a launching pad for Gulf Cooperation Council (GCC) efforts to undermine Syrian President Bashar al Assad's regime, some of this preferential treatment has cooled. The sharp increase in government expenditures and growing criticism of the monarchy have left Jordan in a dangerous position. Faced with a massive trade deficit, Amman can no longer afford to offer such heavily subsidized utilities and has even proposed a tariff on Jordanian subjects to cover the additional cost of the more expensive Saudi crude.

Jordan's King Abdullah will likely be reminded of his country's geographic proximity to Syria and the useful role it could play against the Syrian regime when he presses his GCC neighbors, especially Saudi Arabia and Qatar, for economic relief. Although GCC funds and supplies have allegedly already made their way to the Syrian opposition, Jordan would provide a more stable, GCC-friendly base of operations for moving supplies across the Syrian border. Although Jordan's proximity to the Syrian conflict has restrained Amman's involvement in attempting to topple the al Assad regime, its growing internal difficulties and need for financial assistance may change this attitude.

However, the GCC states are aware that they cannot let their broader campaign against Iranian influence in the region come at the expense of the Jordanian monarchy's hold on power. While Jordan's current energy instability has not yet posed an imminent threat to King Abdullah's rule, if left unchecked it could increase the opposition and protests already plaguing the region's ruling elite.